What you need to know about dealmaking in 2017

There’s no doubt that 2016 will go down as one for the record books. This year, while it got off to a slow start, the market remained strong, with the US stock market indices achieving their highest levels in history in December 2016, despite the uncertainty and largely unexpected outcomes of the Brexit vote and the US presidential election.

Upon reflecting on the past year, two fundamental drivers that have been at the core of our deals outlook have been validated – namely, that the resiliency and strength of the US economy continues to make our country among the most attractive for dealmaking – and that there continues to be a general hunger from companies to find avenues to grow quickly through inorganic means. Our 2016 CEO Survey findings showed appetites for deals were unsated despite an historic year for M&A in 2015, with 46% of US CEOs planning to complete a domestic M&A in 2016.

But, as the new presidential administration takes shape, dealmakers should be prepared for several emerging trends in 2017 and beyond, including:

Partly cloudy forecast for cross-border:Overall, cross-border activity in 2016 was slower than 2015, with deal value down 5 percent and volumes declining by 4 percent. Despite the decline in overall cross-border activity, the US is still an attractive place for investors. While outbound deal volume decreased by 15 percent, inbound volume increased by 8 percent in 2016. However, foreign investors, particularly those in China, are preparing to navigate more challenges for cross-border deals than previously anticipated. They are looking to gain more clarity on international trade agreements and regulations under the new administration, as well as resolving cultural differences and understanding what issues they can expect around integration.

Wave of Chinese investments: During a recent trip to China, we learned just how eager Chinese investors are to tap into the US market. In some cases, the US is the only place they plan to invest as they see this market as a safer bet with a more stable currency, more resiliency and economic stability versus Europe and other areas of the globe. In the past, Chinese businesses invested in US-based technology to take intellectual property back to China, but this new wave of Chinese investors are looking to own and operate businesses in the US. We expect interest to continue in healthcare, tech, media, telecom, hospitality, retail and consumer industries.

Regulatory headwinds: It’s still too early to tell how the regulatory landscape may shift or ease under President-elect Trump’s administration, however companies we’re working with are exploring various scenarios so that their long-term dealmaking strategy stays on the straight and narrow. Industries most likely to be impacted include: healthcare, pharmaceutical/life sciences, technology, industrials, power/energy, banking and financial services.

Viability of megadeals: A wave of recently announced megadeals across several different industries (including AT&T-Time Warner, Qualcomm-NXP, CenturyLink-Level 3) shows that appetite for megadeals isn’t going away. This continues the transformation that they’ve created in certain industries like Entertainment, Media and Communications over the last few years. What remains to be seen however, is how closely these deals get scrutinized under the new administration and whether they actually make it to the finish line especially given that 2016 turned out to be a significant year for withdrawn megadeals. Based on history, we can expect to see a number of assets to come to market as a result of regulatory concerns or duplicity surrounding some of these mega transactions.

The return of the IPO market: Unicorns may find it increasingly difficult to hold off on going public in the short-term with mounting pressure from investors and employees to cash in, the need for a higher profile or more liquid stock to fund acquisitions, and a decline in pace of private fundraising. The good news is investors are once again turning to the IPO market as a way to achieve returns in a systematic manner. A robust pipeline with several big names waiting to make their public market debuts should prompt others to follow suit. New issuers will need to be prepared with their regulatory and marketing story early on in order to take advantage of the market when the window opens.

The rise of alternative financing: US private equity deal volumes are mostly flat compared to 2015. While dry powder continues to be at record amounts, it has largely stayed on the sidelines. Is this the year private equity gets in on the action and competes with corporate and foreign buyers for attractive assets with the potential for high returns? Time will tell but we do expect private equity to look for alternative ways to finance deals in order to compete with strategic buyers – including equity partnerships with corporations and using non-bank lenders. We also expect private equity to continue to focus on driving value in their existing portfolio companies through strategic bolt-on acquisitions that may have more favorable valuation metrics.

In the year ahead, we expect companies to continue to aggressively pursue strategic plays that will allow them to influence their sector. Technology-driven disruption will remain a key driving force behind deal activity. Competitive pressures, consumer power and the need to innovate are likely to continue to keep M&A on the forefront for many companies.